I)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
DEPUTY COMMISSIONER
September 14, 2012
The Honorable Carl Levin
Chairman
Permanent Subcommittee on Investigations
Senate Committee on Homeland Security
and Government Affairs
United States Senate
Washington, D.C. 20515
Dear Senator Levin:
I am responding to your letter to Commissioner Shulman dated August 31,2012,
requesting additional information about section 501 (c)(4) organizations. This response
supplements the previous responses dated June 4,2012, July 13, 2012 and
August 24,2012, and addresses the additional questions raised in your recent letter.
Question 1. If the IRS determines that an organization that has been given
501(c)(4) status has not engaged primarily in social welfare activities, but instead
was primarily engaged in activity within the scope of section 527, what are the
consequences for the organization? What are the consequences for such an
organization having not filed timely Forms 8871 and 8872? Must they file such
forms after the fact? What taxes will be due? Will contributions that already have
been made to that organization be taxable to that organization?
If an IRS audit or examination concludes that a section 501 (c)(4) organization does not
engage primarily in social welfare activities, the IRS may revoke the tax-exempt status
of that organization. If the tax-exempt status is revoked, the organization is a taxable
entity effective, in general, as of the first day of the tax year under examination. The
organization is required to file Federal income tax returns, generally a Form 1120, U.S.
Corporation Income Tax. The tax treatment of the organization's contributions and
other income is determined under normal rules of Subtitle A.
Whether an organization no longer qualifies to be tax-exempt under section 501 (c)(4)
does not determine whether it is a political organization under section 527. Section
527(e)(1) defines a political organization as a party, committee, or other organization
that is organized and operated primarily for the purpose of directly or indirectly
accepting contributions or making expenditures for an exempt function (as defined in
527(e)(2)). If an organization meets this definition, then its tax status is determined
under section 527.
2
Subject to certain exceptions, to be tax-exempt under section 527,1 a political
organization is required to give notice electronically to the Service.
2
The required notice
form is Form 8871, Political Organization Notice of Section 527 Status. To be tax
exempt, the political organization must file Form 8871 within 24 hours after the date on
which it was established. If the organization has a material change in any of the
information reported on Form 8871, it must file an amended Form 8871 within 30 days
of the material change to maintain its tax-exempt status. When the organization
terminates its existence, it must file a final Form 8871 within 30 days of termination.
3
An organization that is required to file Form 8871, but fails to file on a timely basis, will
not be treated as a tax-exempt political organization for any period before the date Form
8871 is filed.
4
The taxable income of the organization for any period in which it failed to
file Form 8871 (or, in the case of a material change, the period beginning with the date
of the material change and ending on the date it satisfies the notice requirement) is
subject to tax and must be reported on the annual income tax return Form 112Q-POL.
5
The tax is computed by multiplying the organization's taxable income by the highest
federal corporate tax rate, 6 currently 35 percent. For purposes of computing its taxable
income for any period, the organization includes its exempt function income (including
contributions received, membership dues, and political receipts), minus any
deductions directly connected with the production of that income, but may not deduct
its exempt function expenditures for the period.
8
Generally, tax-exempt political organizations that have, or expect to have.
contributions or expenditures exceeding $25,000 during a calendar year are required
to file Form 8872, Political Organization Report of Contributions and Expenditures,
beginning with the first month or quarter during the calendar year in which they
accept contributions or make expenditures.
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A tax-exempt political organization
subject to the periodic reporting requirement may choose to file Form 8872 on a
monthly basis or on a quarterly/semiannual basis, but it must file on the same basis
for the entire calendar year. In addition, tax-exempt political organizations that make
1 Tax-exempt political organizations generally are sUbject to tax on the excess of their gross
income (excluding any exempt function income) over allowable deductions that are directly
connected with the production of the gross income (excluding exempt function income). IRC
527(c). .
IRC 527(i)(1 )(A), (i)(5), (i)(6); Rev. Rul. 2003-49, 2003-1 C. B. 903.
3 1RC 527(i)(2).
" IRC 527(i)(1)(B).
5 IRC 527(i)(4). A political organization, whether or not tax-exempt, that has taxable income in
excess of the $100 specific deduction allowed under 527 is required to file an annual income
tax return on Form 1120- POL, U. S. Income Tax Return for Certain Political Organizations. IRC
6012(a)(6); Rev. Rul. 2003-49..
6 IRC 527(b); Rev. Rul. 2003-49.
7 IRC 527(i)(4); Rev. Rul. 2003-49.
8 IRC 162(e) denies a deduction for political campaign expenditures.
9 IRC 5270>; Rev. Rul. 2003-49. All tax-exempt political organizations are SUbject to the
reporting requirements of IRC 5270>, except for those political organizations described in
527U)(5).
3
contributions or expenditures with respect to an election for federal office ~ a s defined
in 527(j)(6 may be required to file pre-election reports for that election. 0
A tax-exempt political organization that does not timely file the required Form 8872,
or that fails to include the information required on the Form 8872. must pay an
amount calculated by multiplying the amount of contributions and expenditures that
are not disclosed by the highest federal corporate tax rate,11 currently 35 percent.
Question 2. How many 501(c)(4) organizations which appear to be primarily
engaged in political activity have been notified by the IRS within the last 6 months
that they may be in violation of the law?
When the IRS examines a section 501 (c)(4) organization, the objective of the audit
is to determine whether that organization qualifies for a x ~ e x e m p t status as a social
welfare organization. As discussed in our June 4,2012 response to your
March 30, 2012 letter, that detennination looks to whether the organization is
primarily engaged in activities that promote social welfare. not organized or operated
for profit, and the net earnings of which do not inure to the benefit of any private
shareholder or individual. The examination looks at the activities engaged in during
the complete taxable year at issue. Although the promotion of social welfare does
not include direct or indirect participation or intervention in political campaigns on
behalf of or in opposition to any candidate for public office, a section 501 (c)(4) social
welfare organization can engage in political activities as long as it is primarily
engaged in activities that promote social welfare.
If the IRS believes that an organization does not meet the requirements under
section 501 (c)(4), the IRS notifies the organization of its intention to revoke the
organization's exempt status, explaining the law and reasons for the proposed
revocation. The organization has 30 days from the date of that letter to protest or
appeal the detennination before a final revocation letter is issued to the organization.
During the past six months, no notices of proposed or final revocation were issued to
section 501 (c)(4) organizations. Note that the IRS currently has more than 70
ongoing examinations of section 501 (c)(4) organizations (this includes examinations
for a variety of issues, some of which include whether the organization is primarily
engaged in activities that promote social welfare). It is also important to note that
the Service also maintains a detennination process to review the operations of an
organization to detennine whether it should be recognized as tax exempt. In this
area, we also review compliance with the legal requirements, including whether an
organization is primary engaged in activities that promote social welfare. There are
currently more than 1,600 organizations in the determination process seeking
recognition as a section 501 (c)(4) organization. The level of political activity is an
issue in a number of these determination cases.
10 IRC 5270)(2)(A)(i)(II); Rev. Rul. 2003-49.
11 IRC 5270)(1).
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I hope this information is helpful. If you have questions, please contact me or have your
staff contact Catherine Barre at (202) 622-3720.
Sincerely,
/ r / ~
Steven T. Miller
Deputy Commissioner
for Services and Enforcement